Exercise 6A-3 Cost Behavior; High-Low Method [LO6-10]Hoi Chong Transport, Ltd., operates a fleet of...

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Exercise 6A-3 Cost Behavior; High-Low Method [LO6-10]
Hoi Chong Transport, Ltd., operates a fleet of delivery trucksin Singapore. The company has determined that if a truck is driven96,000 kilometers during a year, the average operating cost is 10.3cents per kilometer. If a truck is driven only 64,000 kilometersduring a year, the average operating cost increases to 11.5 centsper kilometer.
Required:
1. Using the high-low method, estimate the variable operatingcost per kilometer and the annual fixed operating cost associatedwith the fleet of trucks.
2. Express the variable and fixed costs in the form Y = a +bX.
3. If a truck were driven 80,000 kilometers during a year, whattotal operating cost would you expect to be incurred?

Answer & Explanation Solved by verified expert

4.5 Ratings (714 Votes)

High Low Working

Note:
units = Kilometers

		Units	Cost
High Level		96,000	$ 988,800.00
Low Level		64,000	$ 736,000.00
Difference		32,000	$ 252,800.00

A	Difference in Cost		$ 252,800.00
B	Difference in units		32,000
C = A/B	Variable cost per unit		$ 7.90

Working		High Level	Low Level
A	Total Cost	$ 988,800.00	$ 736,000.00
B	Total Units	96000	64000
C	Variable cost per unit	$ 7.90	$ 7.90
D = B x C	Total Variable cost	$ 758,400.00	$ 505,600.00
E = A - D	Total Fixed Cost	$ 230,400.00	$ 230,400.00

Requirement 1
Variable cost = $ 7.90 per kilometres
Fixed Cost = $ 230,400
Requirement 2
Y = a + bX
Y(total cost) = $ 230,400 + $7.90X
Requirement 3

Y(total cost) = $ 230,400 + $7.90X
Total Operating cost = 230400 + (7.90 x 80000)
= 230400 + 632000
= $ 862,400 = Answer

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In: AccountingExercise 6A-3 Cost Behavior; High-Low Method [LO6-10]Hoi Chong Transport, Ltd., operates a fleet of delivery...Exercise 6A-3 Cost Behavior; High-Low Method [LO6-10]Hoi Chong Transport, Ltd., operates a fleet of delivery trucksin Singapore. The company has determined that if a truck is driven96,000 kilometers during a year, the average operating cost is 10.3cents per kilometer. If a truck is driven only 64,000 kilometersduring a year, the average operating cost increases to 11.5 centsper kilometer.Required:1. Using the high-low method, estimate the variable operatingcost per kilometer and the annual fixed operating cost associatedwith the fleet of trucks.2. Express the variable and fixed costs in the form Y = a +bX.3. If a truck were driven 80,000 kilometers during a year, whattotal operating cost would you expect to be incurred?